Loopholes of the Rich E-Book

Diane Kennedy

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 437

Veröffentlichungsjahr: 2010

Beschreibung

Loopholes of the Rich helps Americans from all walks of life use the same tax loopholes that the wealthy use to lower their tax bill. With this handy guide, you won?t need an accountant to find quick and easy ways to pay less. And there?s nothing unethical about these tax loopholes. In fact, the government wants you to take advantage of them! These tax-reducing tactics and strategies can give you the freedom to save for your family?s future or for your own financial independence. Plus, you?ll find a handy checklist of more than 300 business deductions, real-life tax strategy examples, useful sample forms, explanations of IRS codes and rules, and much more.

Leseprobe

Table of Contents

Title Page

Copyright Page

Foreword

Introduction

Are You Living Your Dream ... or Your Nightmare?

Where Did It All Go Wrong?

What Does It Mean to Be Average?

How to Improve the Odds

How to Put More Money in Your Pocket Today

Loopholes Are Government Incentives

A Word of Caution

What You Will Learn in Loopholes of the Rich

How the Book Is Set Up

Different Financial Strategies

Meet Ted and Ellen: What Went Wrong?

When Did the Dream Die?

PART I - The Five STEPS to Financial Freedom

Chapter 1 - STARTING POINT—UNDERSTANDING YOUR FINANCIAL STORY

Five STEPS to Financial Freedom through Loopholes

Where Are You Now?

How to Find Out Where You Are

Know Where Your Money Goes

Financial Statements Made Easy

Income Statement

Balance Sheet

Statement of Cash Flows

Real-Life Financial Statement Assessment

Chapter 2 - TEAM—BUILDING A TEAM THAT SUPPORTS YOU

Who Is on Your Team?

Crabs in a Box

Point of View

When You Hear “You Can’t Do That!”

Do You Really Need a Team?

Who’s on Your Team Now?

Who Do You Want on Your Team?

How Do You Find the Right Advisors?

Evaluating Your Advisors

Building Your Team

Chapter 3 - EVALUATION—CONSTRUCTING A TAX LOOPHOLES STRATEGY

How Do You Get What You Want?

Evaluating Where You Are

Evaluation for Ted and Ellen

Chapter 4 - PATH—CREATING AN ACTION PLAN

Action

Implementing Ted and Ellen’s Tax Plan

Recordkeeping Requirements

What to Keep and Why

Implementing Your Tax Plan

Chapter 5 - STARTING POINT—WHAT WORKED, WHAT DIDN’T WORK

How Did You Do?

Reevaluate

Awareness

What Stops You

How to Find Your Blocks

Not Much Progress

Little Changes Make Big Differences

Positive Steps

PART II - Jump Start! Your Wealth

Chapter 6 - JUMP START! PRINCIPLES FOR TAX-ADVANTAGED WEALTH BUILDING

Jump Start! Your Wealth

Leverage of Money

Leverage of Time

Velocity

Cash Flow

The Seven Steps of Jump Start!

The Results?

Chapter 7 - CREATING INCOME WITH LESS TAX

Create a Business

The Problem Is Your Paycheck!

Earn-Tax-Spend Syndrome

What Is a Business?

Hobby versus Business

Rules for Having a Business

When Is a Business not a Business?

Employee or Independent Contractor?

Twenty IRS Factors for Independent Contractor Freedom

Independent Contractor Summary

Three Types of Income for a Business

Chapter 8 - USING BUSINESS STRUCTURES TO CREATE LEGAL TAX LOOPHOLES

Basics of Business Structures

Limited Liability Company

Sole Proprietorship

Limited Partnership

S Corporation

C Corporation

Requirements of Business Structures

Protecting Your Business Structure

Tax Tail Wagging the Economic Dog

Business Structure Considerations

Tax Planning

Funding Sources and Exit Strategies

Asset Protection

Which Business Structure Is Right for You?

Final Note on Business Structures

Chapter 9 - DISCOVER YOUR HIDDEN TAX LOOPHOLES

What’s Deductible?

Importance of Business Deductions

Commonly Overlooked Business Deductions

Hidden Business Deductions

Tax Credits

Hot Tax Loopholes for Businesses and Investors

Chapter 10 - CONTROL WHEN AND HOW MUCH YOU PAY IN TAXES

Control

Jump Start! Method to Pay No Taxes

Real Estate Professional Status

Creating Real Estate Loopholes

Balancing Business and Real Estate

Seven Ways to Minimize Taxes

Beware the Ticking Tax Bomb—Alternative Minimum Tax

What Is AMT?

How Do You Calculate AMT?

When Loopholes Aren’t Loopholes Anymore—Tax Preference Items

Loopholes Strategies for Individual AMT Planning

Loopholes Strategies for Business AMT Planning

Chapter 11 - SMART REAL ESTATE INVESTING

Investing with a Business

Building for the Business

Home Office for the Business

Investing without a Business

Real Estate Professional Status

What Type of Investor Are You?

Impact of Other Income

Using Leverage

Holding Title

Business Structures for Real Estate

Chapter 12 - REAL ESTATE LOOPHOLES TO TAKE MONEY OUT OF YOUR PROPERTY

Four Ways to Make Money from Real Estate

Cash Flow from the Property

Tax Benefits of Ownership

Debt Pay-Down

Appreciation

Chapter 13 - BUYING A HOME THE RIGHT WAY

Buying a Home

Protecting Your Home

Mortgage Interest Deductions

Home Equity Debt

Mortgage Interest Loophole

Mortgage Points

Vacation Home

Recordkeeping Requirements for Your Principal Residence

High Income Warning

Chapter 14 - HOME LOOPHOLES SO YOUR HOME PAYS YOU

Does Your Home Work for You?

HomeLoophole #1—Live in Your Home for Two Years

HomeLoophole #2—Live in Your Property for Less Than Two Years

HomeLoophole #3—Live in Your Property for More Than Two Years

HomeLoophole #4—Renting Rooms

HomeLoophole #5—Defense for High Income Loss of Deductions

HomeLoophole #6—Home Equity Loan Full Deductibility

HomeLoophole #7—Controlled Entity Sale to Step Up Depreciation

HomeLoophole #8—Controlled Entity Sale to Sell Apportioned Property

HomeLoophole #9—Controlled Entity Sale to Save Two-Year Residency

Jump Start! Your Wealth

PART III - New Tax Strategies for C Corporations

Chapter 15 - AVOID C CORPORATION PITFALLS

How Do You Form a C Corporation?

Corporate State

Corporate Elections That Must Be Made within the First Year

How Will You Get Money Out of Your C Corporation?

Double Taxation

Controlled Group

Personal Service Corporation

Personal Holding Company

Accumulated Earnings

Chapter 16 - NEW C CORPORATION TAX LOOPHOLES STRATEGIES

Hot New Tax Strategies for C Corporations

Double Taxation Is Still Less Tax

Take Back Lost Passive Losses with Your C Corporation

Change the Character of Income

The Seven Secrets of C Corporations

When Not to Use a C Corporation

C Corporation Choices

PART IV - Take Your Loopholes and Still Sleep at Night

Chapter 17 - ELIMINATE IRS RED FLAGS

Reduce the Likelihood of an Audit

Special Circumstances

Business Form

How Does the IRS Select You for Audit?

Avoid IRS Red Flags

Chapter 18 - HOW TO HAVE A PAINLESS IRS AUDIT

What to Do If You Get a Letter from the IRS

You Get a Letter

Maybe They Made a Mistake

What If You Get an Incorrect 1099?

What If the IRS Is Wrong?

Before the Letter Arrives

How Long Do You Need to Keep Records?

Good Records

Prepare

Common Errors for Businesses

A Final Word

Are You Planning to Be Rich?

Appendix A - TAX LOOPHOLES STRATEGY SUCCESS STORIES

Appendix B - 300+ BUSINESS DEDUCTIONS

Appendix C - IRS PRINCIPAL BUSINESS AND PROFESSIONAL ACTIVITY CODES

Appendix D - SAMPLE FORMS

Index

Meet Diane Kennedy

Copyright © 2005 by Diane Kennedy. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Kennedy, Diane., 1956-

[Loop-holes of the rich]

Loopholes of the rich : how the rich legally make more money and pay less tax

/ Diane Kennedy—Rev. ed. p. cm.

Published simultaneously in Canada.

Includes index.

ISBN 0-471-71178-0 (pbk. : alk. paper)

1. Corporations—Taxation—United States. 2. Tax planning—United States. I. Title.

HJ4653.C7K46 2004

658.15’3—dc22

2004058889

Foreword

There are two parts to making a whole lot of money. The first is earning it and the other is keeping it. The hard part is keeping it. In this book, Loopholes of the Rich, you are going to legally learn how to make more, keep a whole lot more, and pay less tax. One of the things I teach is “The best thing you can do for the poor is not be one of them.”

What you want to do is build a financial fortress around yourself, your family, and your businesses. Do what the rich do by having a plan and a path. You need an effortless strategy that is easy to understand. This book takes you through it step-by-step-by-step. Diane gives you not only a wealth creation system, but a wealth preservation and protection system that is invincible, unstoppable, and resolute, and works for you now and works for the future. What you want to do is create a residual, philanthropic future income that makes your church, temple, mosque, or charity of your choice infinitely better off than they were before you came. So now you have lasting value, because you knew the Loopholes of the Rich.

You deserve to know this information, and now Diane has written it in such an easy-to-understand way that you can make it, keep it, and have it grow. As John Wesley said, “You want to earn all you can, save all you can, invest all you can,” and let me add protect all you can, so then you can give all you can.

—Mark Victor Hansen Co-creator, #1 New York Times best-selling series Chicken Soup for the Soul® Co-author, The One Minute Millionaire

Introduction

THE RULES HAVE CHANGED

Are You Living Your Dream ... or Your Nightmare?

Are you one of the millions today who keep working harder and harder and receive less and less in return for their effort? Just where does that money seem to go? And, even more frightening, where does all your time go? Many today are waking up to the realization that they have somehow gotten old, and their lives so far have only been about striving—with nothing to show for all the years of work.

Where Did It All Go Wrong?

The biggest expenses for the average American are interest and taxes. Both of these expenses put your money in someone else’s pocket. The interest that you pay on your home mortgage, car loan, credit cards, and the like is income to someone else. The taxes you pay go to support the government without much input from you. In other words, the typical middle-class wage earner works to pay other people. And, worse yet, the average American seemingly has no say in how the money is spent. No wonder you feel out of control sometimes!

The middle-class dream has become a nightmare. You can’t work harder at your job and expect to get ahead. And, even worse, you might not know this until it’s too late. You might find out that you have no future just as you’re ready to retire and enjoy your golden years. That’s when you find out the pension you hoped for is gone. That’s when you find out your house costs you more in property tax and insurance than you can afford. And, too late, you find out you now have outdated skills for the job market. This is one nightmare that doesn’t end when you wake up. You don’t even know you’re in the nightmare until you wake up and find out you have no money and no future.

The good news is that there still is a dream possible for you. And that future is possible no matter where you are today. It doesn’t matter where you live. It doesn’t matter how much money you have now. It doesn’t matter how much debt you have. But the way to realize the dream, and end the nightmare, is not the way your parents taught you.

The plan of your parents—work hard, save your money, and collect your retirement—was effective for them, but it doesn’t work now. Loopholes of the Rich was written to provide the information you need to operate in today’s world. In this book you will learn the new rules that the wealthy play by. And you will learn how you can play by the same rules.

What Does It Mean to Be Average?

Five years ago, it was estimated that the average 50-year-old American had a net worth of zero. Consider what that means. It means that someone has worked for 25 or more years and has been able to accumulate nothing. Of course, that’s an average; so for everyone who has assets that exceed their debt, there is someone who owes more than they own. At 50 years of age, they have another 15 years or so to work. A lot has to change if they want to recover from where they are now. They have to reverse the effects of 25 years of work in just 15 more years of work.

Last year, a new study was done. It’s now estimated that an average 50-year-old American has a net worth of minus $7,000! It’s going the wrong way!

The conventional wisdom for the average person just doesn’t work anymore. If you aren’t average, or don’t want to get those average results (owing more than you own), then it means that you’re ready to learn the secrets of tax-advantaged wealth building that the rich know.

How to Improve the Odds

Avoid being average by creating balance between financial education and proper financial action. No one person can have all of the answers. A team makes you stronger. Your team should encourage and move you in the right direction. This book will tell you how to find, evaluate, and work with the right team. With their help and advice, you can succeed!

How to Put More Money in Your Pocket Today

Taxes are the single biggest expense for the average American today. One small change in the amount of tax that you pay can create a huge change in how you and your family live your lives. This book will tell you what small changes make the biggest impact.

Even better, you’ll learn strategies that can help you save taxes today! But it takes more than just learning about them. You need to also put the ideas into action. Loopholes of the Rich will show you how to do that as you build a team that supports your goals. But, first, we start with the basics of loopholes.

Loopholes Are Government Incentives

Loopholes are government incentives to promote public policy. They aren’t something shady or shifty. In fact, the government wants you to take advantage of the legal tax loopholes that the tax law provides. So where are the loopholes? You’ll find most of the loopholes in the two areas that most support the economy—businesses and real estate investing. Businesses, and particularly small businesses, provide stimulus to the economy. A growing business employs people, hires consultants, invests in equipment, and just generally kick-starts a struggling economy. In fact, look at recent tax legislation. Does it seem like the tax cuts are unfair? They are! That’s because the government wants to create a change in the economy and knows that the best way to do that is by creating opportunities for businesses to grow.

Real estate loopholes are another important part of public policy. Real estate investors provide housing for people who don’t currently own their own homes. The government has tried to provide that same kind of housing (called public housing), and the result is decaying tenements where no one wants to live. In fact, while property values have generally appreciated (when taking the long-range view), public housing values have generally gone down. The government therefore provides the loopholes in order to encourage real estate investors.

The first edition of Loopholes of the Rich was published in 2001. Since then, I’ve heard from thousands of people about how they have made more money and reduced their taxes by taking advantage of the tax loopholes that the government wants you to use. The loopholes are there! The government puts them there for us to use, but it’s up to us to find them.

A Word of Caution

You will hear ideas and examples throughout the book that will excite you. You will likely find that the people in the examples have situations very much like yours. You will want to do something—be moved to take action. That’s great! The caution is that you must follow all the steps closely. One of the fundamental, key steps is the need to have a good team. Find advisors whom you can trust to give you the best advice.

The Do-It-Yourselfer

Every so often, as I speak at seminars, participants’ questions make it clear that they intend to do it themselves in attempting to find the right business structure for their businesses. I am reminded of a medical school classmate of a friend of mine.

It had become evident who the top student in the class was by the second year of medical school. In fact, this particular young man was so far advanced that he had trouble communicating with any of his fellow students and many of the professors. As his knowledge, and his conceit, grew, he began to believe that he was more competent than anyone else in the medical profession. This was in spite of the fact that he was only in his second year of medical school.

With that belief, he self-diagnosed a potential appendix problem for himself and determined that he should have an appendectomy. Of course, he felt that no one was as good as he was, so he also decided to remove the appendix himself.

He gave himself local anesthesia and rigged up mirrors on his narrow dormitory bed so that he could view the operating site—his own abdomen. His skill might have been top-notch, but he couldn’t stanch the flow of blood quickly enough and soon passed out from the blood loss. Luckily, he was discovered before he died from the failed surgery attempt.

He was trained, he was competent, and he almost died trying to do it himself!

The Bottom Line: Use trained professionals; don’t try this by yourself.

What You Will Learn in Loopholes of the Rich

Loopholes of the Rich came about as a result of my years of experience working with people who searched for ways to reduce their taxes and increase their wealth. After talking to literally thousands of people from all over the United States and Canada, from all walks of life, with different assets, educations, and circumstances, I found that there were often similar questions and stumbling blocks that they encountered. That is why this book was written—to create a common ground of understanding as a foundation on which you can build with your own personal advisors.

The first statement that I generally hear from someone just starting is “I don’t know where to start!” They ask, “What do I do first?” Usually they have a stated goal of what they want, such as to pay less taxes and to protect their assets. But they might not know what it is they really want. After a few minutes of conversation, we usually discover that what they are really after is a sense of control and understanding about their own finances. They don’t feel good about what they have done to date. They want to know that someday they will be able to have true financial freedom. And they want to know that they have that freedom protected. In other words, they want to be able to keep their financial freedom.

Perhaps you have longed for the same goal. As you read through this book, you will likely find some of your current ideas challenged. And, even more important, you might find that your friends and current advisors will challenge the ideas presented here. That doesn’t mean that your friends are wrong and it doesn’t mean that the ideas in the book are wrong. What it does mean is that we all understand things within our own framework and point of view. If something comes along that is not in that point of view, either we can reject it as incorrect or we can try to adjust our point of view to accept it. If you choose to accept different ideas, then you can experience growth and more depth of understanding. That is really what this book is about—to give you different ideas about things you might already think you know.

Above all, I have striven to present the ideas in a format that makes them easy to understand. We will be discussing tax loophole strategies and tax law. You can’t learn those subjects from reading just one book. You actually can’t ever say you have completely learned them, because tax law is constantly changing as new cases are decided, refinements are added by additional Treasury regulations, and, of course, the inevitable changes to the tax code are enacted by Congress.

Loopholes of the RichSuccess Story

Scott had worked as a manager making a very respectable salary of about $50,000 per year. But, seven years after graduation from college, he was deeper in debt than when he had graduated. Scott talked about how he dreaded driving to work every day. He didn’t know how much longer his car would last. And if it broke down, he had no money with which to repair it and no more credit available on his credit cards. So, each day he worried as he drove to and from work.

The car lasted. . . but his job did not. Scott was now faced with no income. Luckily, he soon got work as an independent business consultant. Interestingly enough, he made almost $50,000 in his first year. But he didn’t make it as an employee—he made it as a business owner. And Scott had made use of the tax loopholes to set up the right business structure and take the legal deductions, so he ended up with more money in his pocket. In fact, at the end of his first year he had $10,000 more cash even though he had made the same amount of money!

Scott had used the tax loopholes that the government wants him to use. Scott is now my business partner at TaxLoopholes and D Kennedy & Associates (DKA). We both use the money we make from the businesses (after taking all of the tax-free benefits we can) to invest in real estate. Our wealth grows in the best tax-advantaged ways.

How the Book Is Set Up

The book is divided into four sections. Each section is important and builds upon the other. I suggest that you read the book through once, completely. Then go back to more closely read the chapters that are most applicable to your own circumstances. The four sections are:

I. The Five STEPS to Financial Freedom

Learn the five STEPS to financial freedom so you can achieve the ultimate in tax savings and start building wealth today.

II. Jump Start! Your Wealth

Learn the seven pillars of wealth building that use the tax advantages of the rich. This section teaches you how to maximize and coordinate business tax loopholes, real estate loopholes, and home loopholes to create wealth with leverage and velocity.

III. New Tax Strategies for C Corporations

New tax law has created brand-new opportunities for using C corporations. Learn how in this section!

IV. Take Your Loopholes and Still Sleep at Night

Set up your business and accounting to keep what you earn safe from frivolous lawsuits. Learn how to minimize the risk of IRS attack. Reduce the risk of an audit and reduce the risk from an audit.

Bonus

• Real-life tax strategy examples.

• The 300+ Business Deductions checklist.

• IRS business types.

• Sample forms.

Different Financial Strategies

Throughout the book, you will see the stories of different clients unfold. You may find that you have similarities to one of these clients. The clients are actually amalgams of real-life examples. Everything you will read about these clients and their personal experiences has happened to someone. The examples are real, but specific details have been changed. Plus, of course, the names have been changed.

For example, Ted and Ellen are based on the characters of people I have known for a long time. (In fact, I had gone to school with someone like Ellen.) They got trapped in the middle-class nightmare—working hard, not home much with their two children, and tired most of the time. They were looking for a way out. They weren’t afraid to try something new, and they were bright, hardworking people. But they didn’t want to risk their family’s security along the way.

The people you read about are in very different situations with unique issues, but you may find elements in your own situation. Every client of mine has had many learning experiences along the way to their business success. My hope is that you can learn from these experiences as you read about them. Every lesson you learn from someone else and apply is one fewer lesson you won’t have to learn the hard way. I don’t know about you, but that sounds a whole lot easier to me!

Interspersed throughout the narrative, you will find other explanations and many forms. I encourage you to complete the forms and questionnaires that are applicable to your situation. These are tools that I use in my certified public accountant (CPA) practice with clients every day. My sincere wish is that you will have the same good results our clients have experienced. Above all, I wish you success and happiness in your business ventures, and, in fact, in all of life’s adventures.

Meet Ted and Ellen: What Went Wrong?

“What went wrong?” was the first thing that Ellen, my old college pal, said to me when we met to catch up one day.

“We planned everything—good education, good career—and we’re making more money than we ever thought we would,” she continued. “Yet we live hand-to-mouth. They are talking about downsizing where Ted works, and I worry that we’d be out in the street if that happened to him.” She was obviously upset.

“Ellen, the one thing I know is that you are not alone!” I replied, reflecting on my experience with clients in my tax practice.

When Did the Dream Die?

Years earlier, I had met Ted and Ellen while we were attending college. They were looking forward to building their life together—a nice house in the suburbs with the two children they planned. And back then, even though it was barely two decades ago, we all knew the surest route to success was the tried-and-true formula—get a good job, save to buy your first home, start your family, and live happily ever after.

Ted and Ellen were hardworking and achieved their success—new home and family—faster than most. And then one day I ran into them again. The first thing I noticed was how tired they both were. Ellen hadn’t been able to be the stay-at-home mom that she wanted to be and was exhausted from juggling the demands of a typical eight-to-five job with the demands of caring for their eight-year-old son, Josh, and three-year-old daughter, Sarah.

Ted worked days at a job for the state, traditionally a safe, secure job with good benefits. The benefits, though, were quickly being taken away. He was worried about how much longer he would have that job and had started a computer consulting business on the side. He spent his evenings and weekends locked away from his family in a corner of the family room working on his computer.

Both Ted and Ellen felt guilty about the time they spent away from their children and they worried about money for their future (would there be money for the children’s braces, education, and so forth?), and about their own personal future (would there be anything left for them when they were ready to retire?).

We met as friends, but it soon became apparent that I could help them in a professional manner.

I had established my career as a tax advisor and strategist for the wealthy, and as a result had learned many of the loopholes the wealthy used. The simple fact is that the wealthy approach their tax and financial planning in a radically different way than what we have been taught.

Ted and Ellen were happy to discuss their financial plans with me. Together, we created a strategy that reduced their income tax and used the money they previously paid to the government to build wealth, tax-free, for their future. That means that much of the money they used to spend on taxes is now being used to build their future.

Using the same process we still employ today at my CPA firm of (1) assessing, (2) team building, (3) evaluating, (4) implementing, and (5) reassessing, they learned how to jump-start their wealth.

In a series of conversations, they learned the basics of devising a tax plan, and then, together, we built a customized tax strategy, using the approach of the wealthy.

PART I

The Five STEPS to Financial Freedom